Regulation of Natural Monopolies

Running head: ECONOMICS FOR BUSINESS
Economics for Business
Name of the Student:
Name of the University:
Author Note:

2
Error! No text of specified style in document.
ECONOMICS FOR BUSINESS
Introduction
This study deals with explaining how and when government may want to regulate the
price setting of a natural monopoly (Ward & Begg, 2016). The current segment explains the
reasons to why Government regulates monopolies. Some of the reasons are prevention of excess
prices, value of service, Monopsony power, encourage competition and normal monopolies. To
that, the next segment explains how the government regulates monopolies. Price capping by
controller, guideline of value of service, merger policy, breaking up a monopoly, rate of return
regulation and assessment of abuse of monopoly power are some of the conduct on how
Government control monopolies (Greco, Matarazzo & Słowiński, 2016). It is noted that
Government regulators faces difficulty in dealing with natural monopolies in industries such as
electricity business. It is because an electricity company with a monopoly in a specific market
will definitely base its price as well as output decisions on the profit maximization regulation. To
this, there is requirement for government regulation as the government is intended with getting
the right amount of electricity to the right number of group that means allocating efficiently. This
means the Government may select to set a price ceiling for electricity at the level where the price
equals the marginal cost of the firm (Vogel, 2014).
A monopoly can be termed as business or organization that maintains exclusivity if the
supply of a specific product or service as evolves naturally or designed specifically that depends
upon the nature of a market or industry (Tietenberg & Lewis, 2016). In addition, Monopolies are
governed under laws both on a national levels in countries and international levels through
involvement of institutions like World Trade Organization. The concept of monopoly considered
as a danger to free markets where there are particular situations takes place when natural
monopolies are either practically helpful or cost efficient or practically inevitable. In most of the

3
Error! No text of specified style in document.
ECONOMICS FOR BUSINESS
extreme situation, it becomes the most feasible alternative for governments to break up
monopolies by using lawful procedure in the most appropriate way (Greco, Matarazzo &
Słowiński, 2016).
Analysis
Reason to why Government regulates monopolies
Preventing excess prices- It is important to understand the reason behind why Government
regulates natural monopoly is to stop excess prices (Shefrin, 2015). If there is no involvement of
Government, then monopolies could set prices above the competitive equilibrium as and when
required. This circumstance would lead to allocating incompetence as well as decline in the
customer wellbeing as a whole.
Quality of service- Regulation by Government are important, otherwise firms has a monopoly
over the stipulation of specific service where they may have little inducement to present to get
access good quality service. When there is government intervention to natural monopoly, the
firm is bound to meet minimum standards of services (Posner, 2014).
Monopsony power- It is noted that a firm that has monopoly selling power tends to remain in a
location to use Monopsony buying power (McCabe & Snyder, 2015). For instance, supermarkets
usually use their chief market position to condense the profit margins of farmers.
Encourage competition- In some of the industries, it is feasible to support competition and that
leads to condition where there will be less need for government instruction (Lim & Yurukoglu,
2015).